The innocence of Joe Nacchio

“Also I will make justice the measuring line,” we read in Isaiah after sadly reading the headlines, “and [I will make] righteousness the plummet; the hail will sweep away the refuge of lies, and the waters will overflow the hiding place” (Isa. 28:17).

The rise of Joseph P. Nacchio is one of the great American success stories of the 20th century. And the demise of Joseph P. Nacchio is a turn-of-the-century nightmare for a nation and a legal system that have lost their way.

The involvement of Republican officials, moreover, in the white-collar lynching of an innocent man, not unlike the Republican lynch mob currently screaming for Congressman Doug Lamborn’s blood in El Paso County, testifies to the simultaneous manner in which the modern conservative party has lost its intellectual and moral roots and diminished its influence as a conserving political force. If America is, as French filmmaker and terrorism opponent Pierre Rehov claimed last week at a Denver event organized and promoted by our own distinguished blogmaster, “the last fortress,” it will not remain a fortress for long without a renaissance of real character and conviction within its conservative party.

The son of an Italian immigrant who worked as a Brooklyn longshoreman and bartender, Nacchio earned a B.S. in electrical engineering and an MBA from NYU, and an M.S. in Management from MIT.

Few sons of bartenders do this. Even fewer do what Nacchio went on to do both in a quarter- century at AT&T and in five years at the helm of Qwest Communications. In the wake of telecommunications deregulation in 1996, Nacchio was recruited by Phil Anschutz, the Denver business magnate, founder of Qwest, and hugely (if quietly) influential conservative, to take the telecom public and turn it from a regional Bell company into a national communications and Internet powerhouse.

During this period, Nacchio was made chairman of the National Security Telecommunications Advisory Committee and was granted a Top Secret security clearance. One can still find on the Internet glowing articles from the period about Nacchio, whose net worth had reached $170 million before he was 50.

Then the so-called “bubble” burst of 2001 occurred. The plunge affected the entire New Economy. Qwest stock plummeted, along with that of all its competitors. Historical stock prices for Qwest, British Telecom, Sprint, and Deutsche Telecom cement the point. Here are links for the relevant graphs:

Nacchio was no more responsible for Qwest’s plunge than his fellow telecom CEO’s were responsible for their stock plunges. Enron and Worldcom stock tanked during this same market plunge, and their management was just as blameless for it.

If there had been accounting irregularities at Qwest – there was no evidence of this, despite frenetic accusations that an incredulous Nacchio refuted – those irregularities would not have caused the stock to plunge. Accounting irregularities do not cause stock plunges. This was a market- and economy-wide degradation in future earning potential.

Nonetheless, self-serving and public-pandering SEC regulators and attorneys swept into Wall Street like a horde, assuming their easy prey guilty until proven innocent. “Insider trading” and “cooking the books” and “defrauding little old ladies of their life savings” were the self-righteous rallying cry. Insider trading was the hook and the book with which they got Nacchio.

The idea of insider trading is, of course, nonsense. Economists who still maintain an understanding of the moral principles underlying the classical free market – a dying breed indeed, such as the late Milton Friedman and Thomas Sowell — have explained that, to the degree the nebulous idea of insider trading has any discernible meaning, it is a virtue rather than a vice. Management ownership of company stock is one of the greatest incentives to good company performance that exists, sales of stock by those insiders are a matter of public record, and such sales quicken the speed at which company information is communicated in that company’s stock price. It is restriction of insider sales which introduces inefficiency, and thus volatility, into the market and increases risk to the Little Guy.

Since insider sales can never be large enough to move stock prices by themselves and do not deceive anyone in any way, including those who buy the shares sold by the insider, the modern “insider trading” mentality amounts to an expectation that company executives must share in any stock losses of the companies they manage. Otherwise we will suspect him, or in the abominable case of Martha Stewart, her, of “insider trading” and proclaim to the world that she is a villain worthy of doing hard time.

Selling stock in a company you help manage is no different from selling a car that you, as an insider with respect to that car, believe has reached the point of being defect-prone. As long as you commit no dishonesty with respect to the person buying your car, you are engaging in a perfectly legitimate market transaction, even if you do not disclose to the buyer every opinion you have developed about the car from long use of it. Information is always asymmetric in any market. Penalizing those with the best information in the name of protecting the Little Guy is an ideal way to destroy the efficiency of a market and, by extension, the future earning power of the Little Guy.

Martha Stewart and Joe Nacchio both committed identical crimes: being successful in business and making stock sales at the right time. Their being successful in business destroyed the public sympathy to which they were rightfully entitled as they were subjected to such legal outrages. The list of other innocent victims in American business in the last 50 years who have had their lives ruined by the all-purpose “insider trading” tag is long and distinguished. And it shows no signs of abating. It is another of the many symptoms of the widespread antipathy toward business and wealth creation that accompanied the rise of the welfare state, and the concomitant loss of belief in moral capitalism, or anything moral at all, in the 20th century.

In Nacchio’s case, the judge who presided, the federal District of Colorado’s Edward Nottingham, was a Bush 41 appointee. Nottingham, telling Nacchio his crimes represented ones of “overarching greed,” sentenced him to 6 years in prison and fines amounting to over $100 million. Nacchio had already spent $40 million on a tepid legal defense that, as any defense is tempted to do when faced with an irrational witch hunt based on arbitrary, baseless charges, amounted to little more than a play for sympathy and a beg for mercy.

Some of Judge Nottingham’s statements at Nacchio’s sentencing are unbelievable: Nacchio had family and a good job in New Jersey, said Nottingham, but he came to Qwest “because he couldn’t turn it down.” Apparently, any virtuous man would have turned down an offer to be CEO of a major American firm, and Nacchio’s failure to do so just shows what a greedy creep he is. Judge Nottingham could have remained a lowly state judge, but he accepted appointment to the federal bench “because he couldn’t turn it down.”

Nottingham then taunted Nacchio, “I would bet anything Mr. Nacchio…wishes he would have walked away from Qwest in January 2001when he had a chance to do so.” Yes, Your Honor, there is little doubt he does, just as you would wish the same had you known your success would lead to such a preposterous injustice.

After the hearing, U. S. Attorney Troy Eid, a Republican appointed by a Republican, said the Nacchio case was the largest insider trading suit ever filed in the nation based on the number of counts (19), the amount of money involved, and the length of prison term. “Justice worked here,” he proudly told a crowd of news reporters and onlookers.

Thankfully, justice did eventually work in the famous case of Charles Keating, convicted in 1992 on vague charges related to the savings and loan collapses of the 1980’s – collapses driven by arbitrary and constantly changing government regulation of the banking industry, not by anything Keating did wrong. Keating was a boy scout who campaigned against pornography and donated millions to Mother Theresa, but he was steamrolled just as Nacchio was. He spent four and a half years in prison after a kangaroo trial presided over by O.J. Simpson judge Lance Ito. The 9th Circuit Court of Appeals, the nation’s most liberal appeals circuit and no friend to business, later overturned his conviction. Judge Ito, they said, had failed to instruct the jury that Keating must have criminal intent to be convicted of fraud. Ito allowed Keating to be convicted of accidentally committing fraud.

It is possible the inane conviction of Nacchio, who has a wife and handicapped son, may also be overturned on appeal. But Nottingham denied Nacchio’s request to be free on bail pending appeal, meaning Nacchio would have done time for crimes he did not commit had not the 10th Circuit Court of Appeals on Aug 22 overturned this ruling by Nottingham. Two weeks after he self-righteously taunted Nacchio, it came out that a drunken Judge Nottingham had spent $3,000 at a downtown strip club and $150 on an internet dating service. (Irrelevant to the merits of this prosecution, but so much for judgmentalism about things someone can’t turn down and wishes later he had.)

This is the kind of circus the American justice system has become under the onslaught of modern amoral liberalism. Rather than the executor of justice, the system is becoming a monument to injustice, and Republicans are among its chief offenders. U.S. Attorney Eid publicly lamented the 10th Circuit ruling, saying, “We hope the defendant will begin serving his sentence as soon as possible.”

Pierre Rehov called America “the last fortress” because there is a legacy of moral justice here that exists nowhere else in the world. That legacy still preserves hope, but that hope will continue to fade rapidly unless somewhere, somehow basic moral sanity can be restored to a legal system that has become in many places little more than a towering refuge of lies.

Mr. Nacchio, I have no reason to think you will ever read this, but if you do, I want you to know I join the honorable Mr. Anschutz (who took the stand at trial despite his famed passion of privacy) as a character witness on your behalf. You are a decent man, and I hope you and your family know and believe and can find some comfort in that future day when “hail,” in Isaiah’s metaphor, will sweep away the refuge of lies, and water will overflow the hiding place of those who aggrandize themselves by calling the innocent guilty. I hope you can hold on. I hope you can believe. And I hope in that final day you will be found faithful in a Christ who atones for sinners — for all of us — and who ultimately bids you pass from this unjust life into the awesome presence of eternal justice.

Comments on this article

While your article is interesting and I happen to agree with many of your points, you need to keep the following in mind:
1. Qwest did have to restate revenue very substantially, which is, in fact, an “accounting irregularity”.
2. Nacchio was convicted of selling your analogous car because he lied about its condition…clearly knowing it was heading for a breakdown, but intentionally and fraudulently telling all prospective buyers it was not.
3. Stewart was not convicted of insider trading, but rather obstruction of justice. A very different offense.

Your assertion that WorldCom management was blameless for their stock plunge is overstated. When they capitalized line expenses, that was a black and white violation of basic accounting principles in the industry. I worked in Qwest Investor Relations at the time and had 8 years of telecom accounting and finance experience.

To be sure the WCOM stock was in a long decline prior to disclosure of the accounting fraud. But they lost about $10 per share equity the day the fraud was brought to light, if my memory serves. The whole telecom sector got slaughtered that week.

A strong argument can be made that their stock, and the stocks of comparable telecom companies rose to higher levels because of the false reporting. Real people did lose money because of this fraud. To say that Ebbers and Sullivan were blameless really hurts your credibility.

Joe Nacchio pumped and dumped, he had information that the public didn’t have and abused his position.

Qwest used two sets of books that included the “stretch” budget which he used to put the heat on all his managers. Nacchio lied, misled, misguided and then he took the opposite action from what his phony hype suggested. He established high investor expectations, an unrealistic “stretch,” that kept the stock price artificially inflated and then he failed to deliver what he promised. He resorted to well known unconventional accounting pratices in order to inflate revenues and meet promised targets when Qwest’s underlying business softened. He was later exposed for this.

Nacchio introduced a culture of corruption and fear that encouraged an “anything goes” attitude among the ranks of his managers. “Make the nunbers or else,” even if the “numbers” are flim-flam hype, became their marching orders–and they marched. Nacchio’s deceiptful whoopla eventually leaked out and the stock bubble predictably collapsed, the disappointingly weak underlying fundamentals simply couldn’t support the artificially inflated price. Wall Street always punishes disappointment; failure to deliver what was promised is never rewarded. Wall Street hates suprises, especually when those suprises are negative.

Nacchio claimed that he was so optimistic because he had inside knowledge of proposed government contracts that the public didn’t know about. So what happened to all those contracts? Qwest obviously didn’t land them.

Qwest stock was a Joe Nacchio hyped-bubble. When Wall Street and investors finally realized that they had been taken for a ride, it was Joe Nacchio’s culture of corruption and deceiption that turned out to be the pin. Innocent investors were hurt, but Joe had already unloaded. Guilty as charged!

The Crater piece is a pathetic political hack job, his hyper-liberal political agenda is obvious. Crater wasn’t in the room when the analyst meetings took place and he has no clue what the investment community was told and promised. Crater has no idea how this deceiptful hype artificially inflated the stock price. Crater is as phony as Nacchio, himself. What a jerk.

SBoyd: Companies restate revenue all the time. Often it is because of arbitrary and constantly changing accounting rules even the most honest people cannot follow. Nacchio did not lie – no stock sale ever implies any guarantee about the condition of the company being sold, just as no stock purchase entitles the buyer to any such guarantee. Stewart was originally charged with insider trading. Those charges were then dropped and replaced with charges for having lied about the original charges, which apparently now weren’t serious enough to prosecute. The point was not to punish Stewart for actual crimes. The point was to get Stewart.

Mr. Jones: Your own admission that “the telecom sector got slaughtered that week” is precisely my point and contradicts your assertion that it was Worldcom’s accounting problem that caused the slaughter. If Worldcom’s problem did hurt Worldcom’s stock, it was because of the inevitable government assault the entire market knew would be coming, not because accounting entries inherently change the market value of company equity. The latter idea is absurd. Ebbers was innocent, but to say any of these people were innocent in our current anti-business legal and political climate is to invite challenges to one’s credibility. I’d be worried for my own soul if there weren’t challenges to my credibility.

Carter knows nothing about stocks and stock markets. When stock prices are artificially inflated based on phony shareholder reports and hype by management, then there develops a mismatch between the stock price and real underlying fundamentals. And when those weaker than reported fundamentals are ultimately exposed, then the price of the stock is doomed. If an insider takes advantage of his fraud and sells his shares while telling others to buy, as did Nacchio, he is guilty of using their money in order to underwrite and support his sale at inflated prices. Nacchio was guilty of stealing.

Hank: The Nasdaq fell from 5,000 in early 2000 to under 1,500 by the end of 2002 – a loss of over 2/3 of its value. Every company and CEO in the Nasdaq composite (and the Dow, for that matter) must have been putting out phoney shareholder reports, eh? Amazing how they all got discovered at the same time, too!

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